What does the "Know Your Customer" (KYC) principle entail?

The "Know Your Customer" (KYC) principle is a fundamental component of anti-money laundering (AML) efforts, focusing primarily on the identification and verification of a customer's identity. The correct answer emphasizes that KYC involves verifying customer identity and assessing potential risks associated with that customer. This process is crucial for financial institutions to prevent fraud, money laundering, and other illegal activities.

By verifying customer identities, institutions ensure they understand who their customers are and can act against those whose activities might pose a risk based on their profiles or transactional behaviors. Additionally, assessing risks involves evaluating the customer's potential for engaging in transactions that could involve money laundering or other illicit activities. This comprehensive understanding helps the institution make informed decisions about ongoing relationship management with the customer, ensuring compliance with regulatory requirements.

The other options, while related to financial practices, do not align with the core objectives of the KYC principle, which is specifically focused on the relationship between the institution and its customers.